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When fearful banks halted much of their loan business a year ago, the number of SBA loans dropped too. But the SBA program came back to life in a big way in February when $375 million in American Recovery and Reinvestment Act funds was allocated to waive the fees borrowers normally have to pay for Small Business Administration loans.

"This is a great time to take advantage of the benefit SBA offers," said Tom Zernick, the head of SBA lending at Citizens Republic Bancorp Inc. in Michigan.

There is a catch: Time is running out.

"It ends as soon as the appropriations are expired," he said. "The officials in SBA feel that could be as early as December."

From Oct. 1, 2008, through Aug. 31, Citizens led all other banks in Michigan in the total dollar volume of SBA loans made in the state, at slightly more than $27 million.

Huntington Bancshares Inc. came in second in dollar volume with almost $22 million in SBA loans in Michigan, but it led the state in the number of SBA loans it made: 178, compared to Citizens' 125.

There is a secondary market in the guaranteed portion of SBA loans, which banks generally sell so that they can loan that money back out again to someone else. Michael Moraw, a vice president at Huntington who is responsible for the bank's SBA program in Michigan, said that late last year, when many banks across the nation slowed down their lending, that secondary market in SBA loans also dried up.

"A lot of banks that were planning on not holding on to these (SBA loans) found they had to hold these loans, so consequently they got out of the lending" of SBA-backed loans, said Moraw.

The New York Times reported recently that early this year, after the secondary market on SBA-guaranteed loans shriveled, the number of SBA loans nationwide plummeted. In the first few weeks of 2009, the new weekly total of SBA loans was down to $160 million. Then ARRA came into play, and by July and August, new SBA loan volumes were back up, with approved totals ranging from $320 million to $400 million per week.

The ARRA funds for SBA were used to temporarily waive the fee paid by borrowers. On a million dollar loan, that fee would normally come to about $25,000.

Waiving the borrower's upfront fee doesn't directly benefit the bank that makes the SBA loan. However, along with waiving the borrower's fee, the ARRA also temporarily increased the portion of an SBA loan that is guaranteed by the federal government from the normal 75 or 80 percent of a 7(a) loan to 90 percent. That did gratify the banks, because it encouraged the secondary market, which in turn encouraged banks to make more SBA loans.

Zernick said another impact of the ARRA was to make SBA loans available to more companies by raising the limit on the size of businesses that can qualify. Normally, the SBA program is limited to companies with average revenues at or below $6.5 million, but SBA loans now can be offered to companies with net income after taxes of less than $3 million, or tangible net worth less than $8.5 million. Companies like that are way above $6.5 million in revenue.

"I would think 90 percent of owner-occupied businesses would be eligible for an SBA loan," he said.

Zernick said SBA loans are mainly for purchase of equipment, or real estate that the business is going to occupy itself.

"We can also provide companies with a cash injection" through SBA loans, he said, for restructuring debt. If a company is struggling with debt on very short repayment terms, an SBA loan can refinance that debt and "stretch out the amortization," said Zernick.

"On real estate, we can go out 20 or 25 years," said Zernick, "and on permanent working capital, we can go up to seven years."

The amortization on equipment can be up to 10 years or the useful life of the equipment.

"It's all about helping companies with cash flow, and that's really what SBA allows us to do. That's the big benefit to the client," he said.

Zernick said the interest rate that banks can charge is limited by the government and is based on the floating Wall Street Journal prime rate, which is now 3.25 percent, plus 2.75 percent on top of that, for a 7(a) loan of seven years or more.

"We do 7(a) loans as small as $10,000, and we go all the way to the maximum, which is $2 million. So there's nothing small about what we do with small businesses," said Zernick.

SBA-backed loans actually cost the borrower about the same as non-government-backed loans.

"The borrower's going to pay, really, a market rate to borrow from the bank through the SBA program," said Zernick.

However, because the government backs a large part of the loan, it makes capital easier to borrow for those companies that qualify.

"If there is a good business sense there" in a loan applicant's plan for acquiring real estate, Citizens will consider making an SBA-backed loan, but Zernick emphasized that was for "owner-occupied real estate."

Many banks saw the increased value of SBA loans this year, due to the ARRA.

"We budgeted an increase in our (SBA) loan volumes this year, and we are right on plan," said Zernick, although he declined to reveal how much larger its SBA volume is this year compared to last year.

Although the prime rate is very low now, banks over the past year have been "extremely conservative" in making loans, according to Sridhar Sundaram, chair of the finance department at Seidman College of Business at GVSU.

Most business loans, he said, are of the floating rate types, based on the prime rate plus a premium. Lenders are especially cautious about loans to companies that have a large exposure to real estate in particular, such as developers.

"We were at one end of the spectrum in the last few years, providing loans that should not have been provided," Sundaram said of the finance industry. "Now we have gotten extremely conservative.

"I think we are starting to moderate a little bit now. But still, the biggest concern most banks and businesses are looking at is, what will be the inflation that will happen in the next six months to a year, given that the federal government has put so much money into different programs?"

Inflation right now, he said, is about 2 percent — "pretty low at this point in time. The biggest fear is really going forward."

Pete Daly is a Grand Rapids Business Journal staff reporter who covers small business, banking and finance, food service and agriculture and government. Email Pete at pdaly at grbj dot com. Follow him on Twitter @PeteDalyGR

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